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Economic Insight

UK Business Confidence Monitor: National

An authoritative and authentic check on the nation's economic pulse, Q2 2021.

The latest ICAEW Business Confidence Monitor (BCM) shows that Business Confidence has reached record levels, as the success of the UK vaccine programme and declining infection rates increase hopes that large parts of the economy will reopen later this year.

The results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions, and company sizes, ensuring a representative picture of the UK economy. The interviewing is continuous, the latest findings are based on the period between 18 January 2021 and 12 April 2021.

Key points

  1. Confidence is at its highest level on record, reflecting the success of the vaccine roll-out and the sharp decline in infection rates.
  2. Many sources of uncertainty remain, including the possibility that the much hoped-for consumer recovery will disappoint, and the existence of both economic and health risks emerging from other parts of the world.
  3. Companies nevertheless expect their domestic sales to grow strongly over the next 12 months, and their export sales to also rise. They expect profits to increase, in line with domestic sales, and they plan to take on more staff.
  4. Transport problems are a widespread growing concern, especially for those companies that export. Shortages of road and air-freight capacity, Brexit disruptions and the temporary closure of the Suez Canal are all likely factors.
  5. Regulatory requirements are also a large concern, with both Brexit and COVID-19 restrictions contributing at least slightly to the growth in challenges facing businesses.

GDP

Economic recovery stalled through the winter but is now likely to resume.

UK: GDP index

  • The economy rebounded strongly in the summer of 2020 but remained stagnant through the winter. However, March’s strong GDP rise suggests that the recovery is starting to build momentum.
  • By the end of March over 50% of the population had been vaccinated, and the process of removing restrictions began in earnest in mid-April.
  • Early signs, such as credit and debit card transactions, suggest that the economy is now expanding.
  • Consumers have accumulated large stocks of savings, which makes a sharp rise in spending in H2 likely.

Early 2020 saw a major decline in economic activity, with April 2020’s GDP level around 25% lower than that of February 2020. Subsequently the economy recovered most of its losses, so that by July, GDP was less than 10% below its February level. GDP then stagnated throughout the winter months. However, the recovery picked up momentum in 2021, particularly in March when GDP rose by 2.1%—although some of this was due to the work involved in the vaccine roll-out itself counting towards GDP, as well as the benefits of some restrictions being relaxed.

Unemployment rose in 2020, and there were company failures, but government support measures cushioned the blow and prevented a downward spiral from emerging. Now in 2021, thanks to the success of the vaccination programme and the consequent gradual removal of restrictions, economic prospects are brightening. 

Important elements include the reopening of non-essential retailers and outdoor hospitality. Early evidence of the impact of this is encouraging. The level of credit and debit card spending in mid-April was 10% higher than a month earlier. Retail footfall has also improved markedly, while restaurant bookings recovered to around 60% of the 2019 level in the week of 12 April, from zero the week before. 

Furthermore, consumers have accumulated significant savings over the past year, which means that a large increase in demand in the second half of 2021 is quite possible, if confidence recovers. Early signs on that are also promising: March’s GfK household survey suggested that consumer confidence, although still in negative territory, was markedly up on a year earlier. 

Confidence overall

Record high for business confidence, but big uncertainties remain.

  • Confidence reached a record level in Q2 with the Business Confidence Index standing at 38.5.
  • With the economy opening up there are reasons to believe that confidence will remain high for a while. If so, that should be good for investment and employment.
  • There are also many and large uncertainties. Consumer spending may not grow as strongly as we expect, and the economic restructuring that the pandemic has fostered may mean job losses in the short term, particularly when the government’s furlough scheme ends in September.
  • The pandemic is also far from over, not least because in terms of public health as well as economics, the UK is far from isolated from the rest of the world.

Business confidence returned to positive territory in Q1 2021. Now, in Q2, the index has risen further to 38.5, signifying that a large majority of companies expect economic conditions to improve over the next 12 months, compared to the past 12 months.

This level of confidence is a record since the launch of the Business Confidence Monitor in 2004. Only in early 2014 has confidence even approached its current level.

Confidence tended to grow during the second quarter survey period, while the latest data from various sources suggests that the economy is now opening up. So, there are good prospects that confidence will remain strongly positive for some time ahead.

However, there are also many uncertainties. Consumer spending may not rebound as strongly as hoped, with the rise that has occurred in household savings heavily weighted towards those who were already relatively well-off, and the planned September ending of the government’s furlough scheme possibly leading to job losses. Also, the pandemic has accelerated the pace of restructuring in the economy, including a shift towards online shopping, and that could mean job losses while the economy adjusts.

Furthermore, the pandemic is far from over. Infections could rise again, perhaps due to rising infection rates elsewhere in the world, necessitating new restrictions. So, while business confidence is high, it may yet prove to be fragile.

Sales

Domestic sales are expected to outpace export sales over the next 12 months.

  • The sharp rise in confidence this quarter is reflected in expectations of record growth in domestic sales of 7.0%, after a contraction over the last 12 months.
  • All sectors expect domestic sales to rise strongly, led by Transport & Storage and Construction, both of which suffered particularly badly in 2020.
  • Export sales are expected to increase sharply but by less than sales to the domestic market. The UK is seeing a faster vaccine roll-out than most other European nations, and there may be an impact from Brexit.

Immediate business conditions remain tough, with businesses reporting that their domestic sales in Q2 2021 are 1.7% below the level of a year earlier. The exceptions to this are the IT & Communications and Banking, Finance & Insurance sectors, which have both achieved modest sales increases over the past 12 months.

Nevertheless, all sectors expect strong domestic sales growth over the course of the next 12 months, led by Transport & Storage and Construction, which both suffered particularly badly in 2020.

At 7.0%, the expected overall rise in domestic sales will, if it is achieved, be the highest growth rate since the survey began. Admittedly, past experience suggests that actual sales performance is usually a little lower than expectations, but the gap is not normally large.

The story on the export side is similar, but not as marked: a 3.6% expected rise in sales. The decline over the past year was 0.7%, so less than for domestic sales, reflecting the fact that in 2020 the UK under-performed other economies. However, the UK’s strong vaccine roll-out means that its economy is likely to expand faster than others in Europe. Plus, Brexit may be a constraint on export opportunities.

Business challenges

Transport problems are among the dominant growing challenges facing companies.

  • Transport problems rank third among rising challenges facing businesses, behind customer demand and regulatory requirements. Shortages of road-freight and air-freight capacity, Brexit delays and the Suez Canal closure are likely reasons.
  • Brexit and COVID-related restrictions help to explain why regulatory requirements are prominent among growing difficulties but are probably not the only factors.
  • Late payments have faded as a growing problem but are still a more widespread issue than a year ago. Access to capital is not a common cause for growing concern.

Until the pandemic, transport problems were not a prominent factor causing increasing difficulties for companies. However, in Q1 2021 they ranked fifth, and in this quarter, they have risen to third place, behind customer demand and regulatory requirements, overtaking late payments by customers and the ability to expand into new areas.

The most likely explanations are shortage of road-freight and air-freight capacity as the economy begins to expand, plus delays at ports because of new barriers created by Brexit, and just possibly some impact from the temporary closure of the Suez Canal in March. Transport difficulties are more widespread among exporters than among companies that only sell into the domestic market, as is their ability to expand into new areas.

COVID-related restrictions are a factor behind the continued prominence of regulatory requirements as a growing challenge, though less than in the previous quarters, and so too are difficulties arising from the Brexit trade agreement—although in both cases, the impact is more commonly slight rather than significant.

In addition, late payments present a growing challenge to more companies than they did a year ago, but fewer than in either of the two previous quarters. Only a few companies are finding access to capital or availability of skills as increasingly problematic.

Employment and investment

Companies expect to raise employment levels in the year ahead.

  • Employment has fallen over the last year, although the decline has been modest when compared to the size of the shock to output, thanks to the government’s furlough scheme.
  • The scheme is set to end in September this year, which has raised concerns about job losses in late 2021 and into 2022.
  • However, businesses plan to increase their staff levels in the year ahead.  

Over the last 12 months businesses have reduced their employee numbers, by 0.8%. This drop is modest, compared to the size of the output shock that the UK economy has suffered, and in comparison with the fall seen after the Global Financial Crisis. 

Clearly a big factor has been the government’s Coronavirus Job Retention Scheme. The scheme helped to protect almost nine million jobs during the initial lockdown in Spring 2020 and is set to continue in its current form until the end of June, by which time all social restrictions are due to have been lifted. A more limited version will then run to September. 

Some concerns have been raised about the possibility of widespread job losses when the scheme does end. Encouragingly, however, businesses expect their employment levels to rise by 2.5% over the year ahead. If achieved, that would be the fastest rise in six years. 

Unsurprisingly, given the events of the past year, the number of businesses for whom the availability of non-management or management skills are growing challenges is currently very low. Spending on staff development is 0.6% lower than a year ago, but it is forecast to rise over the next 12 months, reflecting the expected upturn in employment.

Investment rates expected to normalise over the next 12 months.

  • After restricting spending over the past year, businesses plan to increase all forms of investment in the year ahead.
  • Rises in capital investment and Research & Development budgets should be supported by a rebound in profits. Reductions in spare capacity should also push companies to invest more.
  • Historically the investment projections of businesses have tended to undershoot actual spending rates, which is encouraging for the wider UK economy.

Since the start of the coronavirus pandemic businesses have been very cautious about investment expenditure. Capital investment fell slightly over the 12 months to Q2 2021. Although Research & Development (R&D) spending rose in the same period, it did so at its slowest pace since mid-2009. 

Businesses now plan to increase their investment spending over the next year. Capital investment is projected to rise by 2.8% and R&D spending by 1.9%. This will return them to more normal territory, especially since actual growth in capital investment and in R&D spending usually exceeds expectations. 

These rises should be supported by an expected increase in profits, made possible by strong sales projections combined with, at least so far, subdued cost rises. In addition, the proportion of businesses operating below capacity has fallen to its lowest rate in over three years, which means that many businesses are likely to need to expand their capital stock.

Stock levels

Stock levels are returning to more familiar territory.

  • In late 2018 and 2019 businesses increased inventory levels sharply, due to Brexit anxieties.
  • The collapse in demand during the pandemic, concerns over supply shortages, as well as a repeat of Brexit concerns, then kept stock levels elevated in 2020.
  • However, the current quarter shows stocks falling back to more familiar territory, as demand begins to pick up and Brexit concerns recede in the wake of the UK-EU trade deal.

Over the last two years stock levels for all types of goods have been elevated, compared to historical norms. This was especially true for finished goods within the Manufacturing, Construction and Retail & Wholesale sectors.

Before the pandemic, Brexit uncertainty was the major explanation for this. In the buildup to the initial October 2019 EU withdrawal deadline, companies increased their inventories of finished goods and raw materials, to safeguard against any disruptions in the absence of a trade deal.

In 2020, following the extension of the UK’s transitionary period, this process continued, although to a lesser extent. But as both domestic and global demand plummeted due to the coronavirus pandemic, companies found themselves struggling to sell goods, and facing disruptions in their supply chains. That boosted stock levels.

Nevertheless, in the current quarter stocks of finished goods, work in progress, components and raw materials are all falling towards more familiar territory. The economy is beginning to reopen, and an EU trade deal is now in place, so businesses have been able to run down inventories. That said, it is possible that companies will keep stock levels somewhat above historical levels, because of worries over possible supply-chain disruptions, and continuing COVID-19 uncertainties.

Confidence by sector

Construction and Transport & Storage businesses most confident about year ahead.

  • IT & Communications and Banking, Finance & Insurance are the only sectors to report rises in both domestic sales and exports in the year to Q2 2021.
  • Transport & Storage and Construction suffered the deepest falls in sales and profits over the last year, as restrictions weighed very heavily on activity in these areas.
  • Businesses in Construction and Transport & Storage are now the most confident about the year ahead, and expect to see the sharpest rebounds in sales, as containment measures are relaxed.

In the year to Q2 2021, IT & Communications and Banking, Finance & Insurance were the only sectors to report expansions in both domestic sales and exports. The former was also the only one to achieve a year-on-year rise in profits. These two sectors have been better able to transition to home working than most. IT & Communications companies have also benefitted from increased demand for digital services.

In contrast, Transport & Storage and Construction have had the most troubled past 12 months, with the two experiencing the sharpest falls in domestic sales, exports, profits and employment. Some businesses will have gained from strong demand for delivery services during the pandemic, but this has been more than offset by the severe damage that travel restrictions have caused in public transport and the airline industry.

However, business confidence has improved across all sectors in Q2 2021, with Construction and Transport & Storage now the most confident, reflecting projections for strong domestic sales growth.

Exports and especially domestic sales are set to rebound across all industries in the year to Q2 2022, and all sectors plan to begin hiring again, with IT & Communications anticipating the fastest rise in this area.

Confidence by region and nation

Widespread improvements in business confidence across UK nations and regions.

  • While immediate business conditions remain tough, business confidence is in firmly positive territory across all UK nations and regions, led by the West Midlands.
  • The South East is also among the most optimistic regions, underpinned by strong sales expectations for the year ahead.
  • Although markedly higher than before, confidence within Northern England is at the lower end, reflecting a more modest sales outlook than elsewhere, and possibly also challenges raised by Brexit.

Businesses’ confidence across all UK nations and regions has markedly improved in Q2 2021, most markedly so in the West Midlands, the region which suffered the steepest falls in both domestic sales and exports over the past 12 months. The region’s confidence is perhaps underpinned by hopes of a release in pent-up demand for cars and consumer goods, both of which are important sectors within the region.

On the downside, the percentage of businesses citing regulatory requirements as a growing concern is highest in the West Midlands, perhaps reflecting high sensitivity to new customs controls and regulatory processes, following Brexit.

The South East is another particularly confident region. Both domestic sales and exports fell at more modest rates than nationally in the year to Q2 2021, and South East businesses are also hopeful about their domestic and export sales in the year ahead. Growth in the former is set to outpace all other regions, and the latter will only be exceeded by Scottish companies.

The business confidence index is lowest in Northern England. Businesses in the region also have the most subdued projections for domestic sales growth, and their forecast growth in exports trails the UK average. The region is one of the most reliant on EU markets.

Confidence by business size and type

Exporters and UK-quoted companies are among the more confident.

  • There has been a sharp rise in confidence across different company types.
  • UK-listed companies are more optimistic than overseas-listed businesses, and they are also more confident than privately owned companies.
  • Exporters are more optimistic than those that only sell into the domestic market, perhaps because they no longer need to worry about the challenges of a possible no-deal Brexit.

Sentiment across different types of companies has improved significantly in Q2 2021. UK quoted companies are more confident than either privately-owned or overseas-listed businesses, perhaps because they are experiencing a favourable combination of higher exposure to the UK economy than foreign-owned companies, alongside some reassurance from a boost to equity market valuations. The former is a positive factor since the UK economy looks set to outperform most of the rest of Europe in 2021, and the latter means that the threat of hostile takeovers by private equity funds has eased as valuations have risen.

Among privately-owned companies, there is little difference between large businesses and small and medium-sized ones.

Companies that export are more confident than those that do not. This is striking, given that export sales are forecast to rise more slowly over the next 12 months than domestic sales. Furthermore, expanding into new markets and transport problems are both more widely cited as growing concerns by exporters than by non-exporters. However, the threat of the UK failing to strike a trade deal with the EU has at last been lifted, and that is likely to have boosted exporters’ confidence.

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Using BCM data

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